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Understanding debt
Community Coordinator
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Understanding debt

It’s no secret that South Africans are over indebted. Every few weeks, headlines scream at us from our cellphones, PCs and newspapers that “South Africa is Drowning is Debt” and “Indebted Consumers Stretch SA to its Limits”. As if we need reminders.

 

The somewhat good news is that we’re not alone in the world. Households in the US, for instance, together have over USD11 trillion in debt. The reason is as simple as it’s obvious: debt is necessary. In reality, few can get to their Nexts, such as paying for a college degree, without taking out credit – or taking on debt.

 

Put simply, debt is the repayment of the original amount plus the interest that builds up over time. Think of interest as the cost of “renting money” from your credit provider. The thing is, taking out credit to move forward in your life isn’t a bad thing, it’s essential. Where most of us run into trouble is the management of our debts, and having too much of one kind of debt: “bad debt”.

 

Types of debt

 

Did you know there’s “good” and “bad” debt. This may seem strange, because most think that owing money of any amount is bad, but this isn’t actually the case. Allow us to explain:

 

Good debt:

 

This is an investment that will grow in value and generate long-term income. Property is a great example, as is a student loan. Compared to other types of loans, student loans have low interest rates. Also, a tertiary education should increase your future potential income.

 

Bad debt:

 

This is what gets all of us. Bad debt is incurred when you buy something on credit that will lose its value quickly and won’t generate long-term income. A pair of shoes bought with a credit card comes to mind. Speaking of credit cards, the debt on these magic swiping devices usually comes with a high interest rate. To avoid a debt avalanche, make sure to pay your balance in full each month and never, ever miss a payment.

 

Though media reports are firm that our debt levels are worrying, there’s some positive news: overall indebtedness has decreased a little, and it’s all because of financial institutions and their change in attitude. Neil Roets, Chief Executive of Debt Rescue, says credit providers have realised that fighting with consumers over debt is not productive. Now, they work with them to resolve and even prevent problems.

 

Today, when you apply for a loan from your bank, they’ll conduct a credit assessment to make sure you can afford it. They’ll look at your income, expenses and other debts. However, this is by no means a guarantee that it’ll be plain sailing; you could lose your job or have to pay for unforeseen medical expenses – life happens and it happens unexpectedly.

 

That’s okay, there is help. Contact Standard Bank’s Debt Care Centre. With patience and the right advice, you can get your life back on track.

 

Sources:

 

 

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